A cheap stock is often cheap for a reason, and usually not a good one. But ignoring a company simply because it looks broken means you may miss a fantastic opportunity to invest in a business the market has abandoned but which still has the wherewithal to turn things around.
Three Motley Fool contributors identified General Motors (GM -0.84%), AMC Networks (AMCX -1.27%), and WW (WW -5.17%) -- formerly known as Weight Watchers -- as businesses that are looking broken and beaten-down, but may yet surprise everyone and reward investors who believe with outstanding returns.
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Can't catch a break
John Bromels (General Motors): GM isn't just absurdly cheap right now, it's been absurdly cheap for years. The stock market seems determined to ignore GM's intrinsic value and wide competitive moat in favor of worries that some disaster is right around the corner. Over the past three years, GM has underperformed the S&P 500 even as it has outperformed expectations.
2018 is a great example of how GM just can't catch a break from the market. The stock fell 18.4% for the year, nearly twice the S&P's drop, and yet the company wasn't doing that badly. It had been guiding toward full-year EPS of $5.80 to $6.20, but ended up posting $6.54 in earnings, 5.5% higher than the upper end of its guidance. Revenue was up by 1% year over year, but margins slipped a little and adjusted automotive free cash flow was down 32.1% from 2017.
This conforms with the general trend in the automotive market: Overall sales are down, but sales of more expensive vehicles like crossover SUVs and pickup trucks are growing. These favorable changes to the company's product mix should help it meet its improved 2019 earnings guidance of $6.50 to $7 a share. Meanwhile, GM's P/E of just 7 is lower than almost all of its automotive peers (Ford's is 9.5 and Toyota's is 10.2). And GM pays a sweet 3.9% dividend to boot.
It's unclear why the market has decided to ignore GM, but there's little question that the stock is still looking absurdly cheap.
Is AMC Networks a dead stock walking?
Anders Bylund (AMC Networks): This cable TV content producer and broadcaster has seen its share prices slip 13% over the last six months. The stock is trading 21% lower in a five-year perspective, missing out on a 52% gain in the S&P 500 market index over the same period. That's in a time period where AMC's earnings nearly tripled and revenues rose by 71%.
So the business is going strong but investors refuse to follow suit. That's why you can buy AMC shares at bargain-bin valuation ratios like 7.4 times trailing earnings and 6.2 times free cash flows. The stock trades at 6.3 times forward earnings estimates, showing that analysts expect the bottom-line growth to continue.
Many investors fear that AMC's ratings juggernaut, The Walking Dead, is losing its cold-blooded hold on cable audiences. That would indeed be bad news for AMC Networks, since the zombie drama stands head and rotting shoulders above other titles in terms of attracting ad sales and syndication partners. A quick headline scan might lead you to believe that the show is running out of undead fairy dust. "Ratings Are Plummeting," entertainment website IGN said last November. "The Walking Dead Falls to New Low," the site TV by the Numbers said this week.
It's easy to jump to scary conclusions among headlines like those. However, The Walking Dead still won this Sunday's ratings battle over a plethora of NCAA basketball games. The Wrap summed up the situation nicely in February:
"The Walking Dead Drops to All-Time Low in Ratings and Viewers (But, Yes, It's Still the No. 1 Show on Cable)."
I don't see the show falling apart anytime soon, and AMC is even spinning off several new titles under the Walking Dead umbrella. And in the end, the company's business is humming with an eye on international expansion through the Starz network and online streaming services.
Some stocks are cheap for good reason. This one deserves to trade higher.
The skinny on this diet center's opportunity
Rich Duprey (WW): There are a lot of reasons that WW stock has slimmed down by more than 70% over the last six months. It has a nondescript branding problem (it calls itself WW now, which it adamantly says doesn't stand for "Weight Watchers"), and the number of paying members was sequentially lower, though higher than last year. And it's had to drag mega-investor Oprah Winfrey back into the spotlight to show she is still a big part of the company after there were reports she was stepping away from her high-profile role.
Yet the market seems to think the business is about to wither and die, pricing it almost as if it is going out of business. At around $19 a share, WW is priced at just six times trailing earnings, 11 times next year's estimates, and at a fraction of its sales. The stock also goes off for the ridiculously discounted rate of less than five times the free cash flow it produces, even though Wall Street is looking for the company to more than double its earnings this year, grow them 28% next year, and expand them at a compound rate of 35% every year for the next five years.
The weight loss center definitely has some messaging issues, but it is quickly bringing itself into the digital future, understanding that people are looking for DIY ways of improving themselves. There are wrinkles that need to be ironed out, but WW is not going out of business, and investors might want to chow down on its stock.
